Hybrid Pension Plans: A Hard Sell

Companies are struggling to provide pension plans that offer the security that people expect. But whether they choose traditional, new or hybrid pension plan models, difficult choices lie ahead – for companies, their employees and for government policymakers.

Traditional pension plans are defined benefit (DB) plans, where covered retirees are guaranteed a given level of income. If the plan falls short, the employer is on the hook.

The new model, increasingly favoured by employers, is defined contribution (DC), where the employer's responsibility is limited to making a certain ("defined") contribution. Contributions made by both the employer and employee go into an individual account for the employee, who makes his or her own investment choices. If the plan falls short, the employee is on the hook.

A hybrid plan, dubbed a "target benefit" plan, is also being used in the public sector. Unlike individual DC accounts, target plans allow large pools of assets to be combined and professionally managed to maintain the strength of traditional DB plans. For employers, target benefit plans are more sustainable in the long run than traditional DB plans.

While hybrid plans may be better in theory, says Mitch Frazer, once companies have opened up the highly charged issue of pensions, they figure they might as well go all the way and adopt DC plans, because they are the easiest to administer. Companies don't adopt hybrids, he says, because they simply don't have to. "I really hate to say it, but if a client called me and said, 'What kind of plan should I do,' I'd say, 'Establish a DC plan, of course. There's much more certainty.'"